Editor's Note: The following is a guest post from Gary Thompson, UK sales director of Siemens Industries and Markets for Siemens Financial Services.
Several cities in the United Kingdom are looking to initiate smart projects to improve the efficiency of local services, enhance sustainability, and develop their competitiveness. Smart city developments improve the ‘livability’ of a city, helping support economic and business growth.
A number of cities are now approaching smart transformation through a series of smaller smart projects that help to generate savings and effectively pay for the initial investment. These projects, costing a few thousand to a few million pounds, can offer highly dependable Return on Investment (ROI), helping to ease the continued pressure on public budgets.
An example of one such "smart" project is the implementation of road pricing systems to reduce the traffic flow in congested urban and interurban areas while also creating funds to reinvest in other environmental projects and pay for the initial project.
The benefits are both economic and environmental. Reduced fuel usage means reduced pollutant emissions and reduced congestion creates a better driving experience. Freer flowing and dynamically managed traffic attracts business and talent to the city because residents waste less valuable time in traffic delays. Additionally, airport, rail and road transport can be more efficiently linked.
A recent study found British roads are the most congested in Europe, with more than 20,300 so called “traffic hotspots” in UK cities — well over double the number in Germany and twice that of France. As our population increases (by 10 million over the next 25 years) it is also predicted that the annual cost of congestion in the UK will rise 63% by 2030 to £21 billion ($27.6 billion). There is an intensifying need to find new ways to manage traffic on our roads and a number of cities have already implemented congestion zones, low-emission zones or other road-charging schemes to tackle the issue.
For example, in 2003, London led the way with a successful introduction of a congestion charge system. The system was very effective in the first years of introduction. Data collected by Transport for London shows that car traffic entering the city fell by 39% between 2002 and 2014.
In recent years, however, there has been an increase in certain types of traffic (delivery vans and private hire vehicles) and a reduction in the road space available for traffic to use. This led to a report this year from the London Assembly Transport Committee calling for a new form of road pricing in the capital to bring in a way of charging people for road usage that is targeted at areas of congestion, at the times it occurs. It is clear that road pricing systems are initiatives that need constant monitoring and flexibility to evolve while meeting the needs of an ever growing population.
Road pricing can work particularly well in small cities where a high concentration of traffic is an issue in a particular area. In Durham, a successful congestion charge system has been in place for 15 years. The medieval city center has narrow roads that are unable to cope with high volumes of traffic. The scheme has achieved an 85% reduction in vehicular traffic leading to a substantial drop in emissions. Revenues raised have been reinvested to support a frequent bus service to and from the area where drivers are charged.
Clearly there are numerous benefits to implementing road pricing techniques. Investing in such systems, however, requires financial resources that may be beyond the reach of city council public budgets. Local councils are estimated to face an overall funding gap of £5.8 billion ($7.6 billion) by 2020 and authorities are therefore looking to other forms of finance to help them invest in new technology.
The reality is that cities need to access a blend of public and private sector finance to accelerate their smart initiatives, enabling them to benefit from the resulting savings, efficiency and improvements to citizen services. A diverse range of funding sources allows a city to make the desired technology investments — using a combination of public and private sector finance — in a timely fashion. Different financiers can be sourced for the different types of technology investment. The sooner the smart investments are implemented, the quicker the savings (or revenues, or inward investments) begin to accrue.
Research from Siemens Financial Services (SFS) investigated nine such assets — including road pricing — and calculated how much asset finance a typical city could potentially access from private sector financiers. The research shows that there is €6.2 billion ($7.3 billion) accessible private-sector funding potential for the development of UK smart cities.
This calculation demonstrates the level to which asset finance can contribute to improving the local population’s health, making public services more efficient and effective, attracting business and talent for economic growth, promoting, and freeing hard-pressed public sector capital for more visionary and experimental smart city initiatives.
Asset finance options are widely available, simple and quick to arrange. They also offer high transparency for cost-benefit monitoring and analysis. Such financing techniques spread the cost over an agreed financing period, with monthly finance payments arranged to align with expected benefits gained over time from new/retrofitted equipment. This removes the need for a large initial outlay, thereby increasing the funds available for other expenditures.
In other words, asset finance allows cities access to the latest technologies, without having to commit scarce capital or use traditional lines of credit. Financing arrangements can also cover other costs such as installation, maintenance and service as well as providing the flexibility to upgrade technology in line with developments.
Cities wanting to upgrade their technology solutions should consider the benefits of a specialist financier, one who has a deep understanding of both the challenges and requirements of public sector financing. Unlike traditional generalist financiers, who might lack comprehensive technical knowledge to fully evaluate the impact a potential investment can bring to the council, specialist financiers understand the technology and its practical application in the public sector.
Road pricing systems are just one example of a small-scale smart city development. They can reduce congestion and cut pollutant emissions, helping to improve the livability of a town or city. The budget has to be available to implement the system in the first place, however. As public funding continues to be cut, many councils are recognizing the important role private sector funders have in helping fulfill their ‘smart’ ambitions.